Low-Income Housing Tax Credit

The Low-Income Housing Tax Credit (LIHTC - often pronounced "lie-tech", Housing Credit) is a dollar-for-dollar tax credit in the United States for affordable housing investments. It was created under the Tax Reform Act of 1986 (TRA86) and gives incentives for the utilization of private equity in the development of affordable housing aimed at low-income Americans.

LIHTC accounts for the majority (approximately 90%) of all [regulated] affordable rental housing created in the United States today.[1] As the maximum rent that can be charged is based upon the Area Median Income ("AMI"), LIHTC housing remains unaffordable to many low-income (<30% AMI) renters. The credits are also commonly called Section 42 credits in reference to the applicable section of the Internal Revenue Code. The tax credits are more attractive than tax deductions as the credits provide a dollar-for-dollar reduction in a taxpayer's federal income tax, whereas a tax deduction only provides a reduction in taxable income. The "passive loss rules" and similar tax changes made by TRA86 greatly reduced the value of tax credits and deductions to individual taxpayers. Less than 10% of current credit expenditures are claimed by individual investors.

References

Diamond, Rebecca, and Tim McQuade. “https://web.stanford.edu/~diamondr/LIHTC_spillovers.pdfhttps://web.stanford.edu/~diamondr/LIHTC_spillovers.pdf” Stanford GSB, December 2017. https://web.stanford.edu/~diamondr/LIHTC_spillovers.pdf. "Abstract: We nonparametrically estimate spillovers of properties Önanced by the Low Income Housing Tax Credit (LIHTC) onto neighborhood residents by developing a new difference-in-differences style estimator. LIHTC development revitalizes low-income neighborhoods, increasing house prices 6.5%, lowering crime rates, and attracting racially and income diverse populations. LIHTC development in higher income areas causes house price declines of 2.5% and attracts lower income households. Linking these price effects to a hedonic model of preferences, LIHTC developments in low-income areas cause aggregate welfare beneÖts of $116 million. Affordable housing development acts like a place-based policy and can revitalize low-income communities."